Thursday, February 26, 2009

The Debt Disease

We collectively, as Americans, have the Debt Disease. From the government on down to the individual - the willingness to spend what we don't have is a cancer that has infected every cell of the American body. The body is still breathing, but it's already a corpse. Recently we have seen the disease shutting down major organs - massive layoffs, neighborhoods ruined, corporations toppled. The debt disease just kept on marching, all the way to Washington, D.C., where it finally metastisized into the 787 billion dollar deficit spending "Stimulus" bill, recently signed by the President.

This bill tries to fix the problem of our nation's Visa being overdrawn, by opening another Visa card, and maxing it out. It wouldn't make sense for an individual, and it doesn't make sense for a government.

The Debt Disease has turned what should have been a normal, periodic retraction of the economy, into a death blow to our institutions.

But 'death blow' how? People don't drop dead from debt!

Allow me to illustrate...

When an individual goes broke, what can they do? File for bankruptcy! They get to keep their assets, but they lose all credit.

When a corporation goes broke, what does it do? It borrows money until the banks won't lend it anymore. Then, the stock drops to zero (shafting the investors), the executives get golden parachutes, and the assets go to auction.

When the US government goes broke, what does it do? It borrows money until no one will lend to it anymore.

At that point, our government has an Ace-in-the-hole. They're just dollars, after all - a currency floated on the world market, with no hard commodity to back it up. Who owns the printing presses for the US dollar? The government!

When the government needs more money, they can just print it.

(It's more complicated than that, involving the Federal Reserve and bonds and interest rates, but at the end of the day, they essentially just print it.)

Flood the market with dollars, and their value becomes diluted. This causes inflation, wiping out the value of savings accounts and screwing pensioners and retirees. HOWEVER, it also makes it really easy to pay off debt! $53 trillion suddenly isn't such a big number. ($53 trillion = the current US government deficit according to Generally Accepted Accounting Principles).

Our government's only way out of debt is to keep printing money until the debt is paid off.

When will this happen? Hard to say. As of this writing, the "Stimulus Package" hasn't come out yet.

To summarize, holding on to dollars seems to be a sucker's bet, to me. I'm opening bank accounts overseas.